Unfortunate, but will uphold national interests, says India. Industry sees minor impact, but trade deal in jeopardy
In the first trade setback since the Modi government was sworn back this week, the US has announced that it will withdraw duty benefits on annual Indian exports of around $5.6 billion under the so-called Generalized System of Preferences (GSP) from June 5, multiplying challenges for new commerce and industry minister Piyush Goyal.
Amid his escalating trade war with Beijing, US President Donald Trump late Friday blamed New Delhi’s failure to assure Washington of “equitable and reasonable” market access for his decision to terminate India’s status as a GSP beneficiary. Earlier, he had termed India a “tariff king”. The US had given a 60-day notice to scrap the GSP incentives, which expired on May 3. But Washington was probably waiting for the Indian elections to be over to carry out the threat.
India has played down the impact, as total US duty concession to it under the GSP was only about $190 million in FY18 and most of the key products are already outside the scheme.
But the US move jeopardises a trade deal that was being finalised after months of negotiations. It could harden New Delhi’s resolve to finally slap proposed retaliatory tariff worth $235 million against the Trump administration’s extra 25% levy on steel supplies, after delaying tit-for-tat action for months. The exports under the GSP account for roughly 11% of India’s total goods exports to the US.
In a statement on Saturday, the Indian commerce ministry said: “India, as part of our bilateral discussions, had offered resolution on significant US requests in an effort to find a mutually-acceptable way forward. It’s unfortunate that this did not find acceptance with the US.” It added: “India, like the US and other nations, shall always uphold its national interest in these matters.”
Under the GSP, 1,784 products — ranging from certain engineering goods and organic chemicals to textiles — are exported from India to the US at zero duty. However, these products, as such, attract low duties there — up to 3% in most engineering and textiles products. Nevertheless, some leather products, processed food items and handlooms could see some impact, which will impact small companies and individuals that produce them.
Ravi Sehgal, chairman of engineering goods exporters’ body EEPC India, earlier told FE the cost of US-produced engineering goods that enjoyed GSP benefits were still 10% higher than the imported ones. Also, while Indian competitiveness will erode by 2-3 percentage points vis-a-vis competitors like Vietnam, Malaysia and Thailand, the exports are unlikely to suffer, given the quality of its products and ability to supply in large volumes. Engineering goods account for as much as a fourth of the total benefits under the GSP.
The immediate trigger for the withdrawal is said to be the tightening of India’s FDI guidelines on e-commerce, which are expected to hit Amazon and Walmart-backed Flipkart. New Delhi’s drive to force global card payments companies such as Mastercard and Visa to move their data to India, and also to levy up to 20% tariffs on electronic products and smartphones have been resisted by the US.
Ganesh Kumar Gupta, president of the Federation of Indian Export Organisations, had said while exporters would be able to absorb the duty loss where it was 2-3%, the government needed to provide support to those products where GSP tariff advantage was significant, particularly in the labour-intensive sectors, including processed food and leather products.
Stressing that India responded to the US requests on sticky issues positively, the commerce ministry made it clear that New Delhi had proposed to replace the current price cap policy for coronary stents with a “suitable trade margin regime” to ease concerns of American manufacturers like Abbott Laboratories and Boston Scientific Corp.
As for the US demand to scrap/cut tariff on ICT products, including high-end mobile phones, New Delhi had said any such across-the-board cut would cost it a massive $3.2 billion a year and help only third parties (like China and Korea); instead, it was willing to lower duties on those products where it would benefit the US. India had also offered to simplify certain certification procedures for dairy imports from the US. However, Washington remained unimpressed.
New Delhi wants the Trump administration to recognise that India is the only large economy whose goods trade surplus with the US has been shrinking (unlike China’s). In fact, in 2018, the surplus shrank $4 billion from the previous year. Also, India will remain the world’s fastest-growing large economy in the coming years, generating opportunities for US businesses in sectors ranging from defence and retail to oil. India is also a thriving market for US services and e-commerce companies like Amazon, Uber, Google and Facebook with billions of dollars of revenue.